Carbon Taxes vs. Cap-and-Trade

Rex W. Tillerson, the chairman and chief executive of ExxonMobil Corp., delivered a speech in Washington yesterday endorsing a carbon tax of about twenty dollars per ton as a better way to address global warming than the principal alternative-policy idea, known as a cap-and-trade system, which has already been adopted in Europe. Many large corporations, accepting the political and policy environment signaled by the 2008 election results, are transiting from fundamental opposition to climate-change remediation policy toward a political-engineering phase in which the corporations will seek to influence policy details and mechanisms. For its part, ExxonMobil has come some distance from its earlier period of funding climate-change skeptics; its new proposal is credible, and puts a notable foot down on one side of a carbon-policy debate that has yet to reach resolution, and which is likely to become fluid later this year. Tillerson said that he had been “chewing” on this dichotomous policy question for three years, searching and failing to find a third alternative, and that he decided Exxon had to weigh in now to avoid risking irrelevancy when the Obama Administration and Congress begin negotiating later.

Last year, the Senate considered but defeated a cap-and-trade bill called Lieberman-Warner. The basic idea of a cap-and-trade system is to control carbon emissions by creating a regulated marketplace in which polluters can buy and sell emissions while adhering to aggregate caps. The case for this approach is that it offers an enforceable total-emissions target, achieved through a market mechanism whose flexibility might ease necessary changes in the industrial economy. The case against it is that it threatens to be complex to administer and is subject to abuses; there are also differing views about whether Europe’s experiment with cap-and-trade has worked well enough to warrant emulation. That Lieberman-Warner made the Senate floor and came within shouting distance of passing has encouraged some environmental groups to stay on this policy path.

All along, however, some economists who are concerned about global warming have advocated a broad carbon tax as an alternative to cap-and-trade. The case for a tax is that it may be a simpler and more durable policy, allowing big businesses and alternative-energy garage-innovators alike to adjust to a global-warming policy in a steady-state environment, motivated by price incentives, rather than regulatory incentives. A carbon tax has appeal for the same reason that a gas tax has appeal—if done properly, it would set a policy and price regime that would change behavior but not require a master’s degree to understand. Tillerson, for example, said Exxon prefers a carbon tax because its capital expenditures are made over decades, and he feared the cap-and-trade bureaucracy might become “a new Wall Street of energy” and whose year-to-year workings and evolution would be difficult to predict.

I have no well-developed view about this debate, and I certainly don’t know enough about what’s happened in Europe to offer an empirical analysis about its example. However, long before Exxon weighed in, I was inclined to think that a carbon tax would be preferable to the invention of a new government-regulated marketplace—replete with executive orders, commissioners, auditors, etc.—if a tax could achieve the same goals. This is a minority view among climate-change types, I understand, but it is not regarded as full-blown heresy.

The majority view, as I understand it, holds that a carbon tax would also be complex to administer—that it would also be subject to abuses—and that, anyway, the cap-and-trade experiment is under way in Europe and should not be abandoned. In any event, my impression has been that a carbon tax was regarded as politically unachievable in the Senate, in comparison to cap-and-trade. That was usually where the discussion stopped. It may be that Exxon et al, adjusting to the political contours of 2009, will start the discussion up again; policies they favor are almost by definition plausible politically. Obviously, Congress is not likely to raise taxes of any kind, or impose the costs of cap-and-trade, while the current economic crisis is in full bloom. But that is not really the question this spring—any politically plausible new carbon tax or regulatory regime would likely be set up to phase in only as the economy recovers. The issue, in the meantime, is what the shape of that regime should be.

Steve Coll, a staff writer, is the dean of the Graduate School of Journalism at Columbia University, and reports on issues of intelligence and national security in the United States and abroad.